When you are in business with a business partner, it is vital to consider the consequences and effect on the business if something happens to one of you including illness, death, desire to sell out or retirement. It is important that you plan for the future of your business to ensure that a proper succession plan is in place so the business can continue with a minimum of disruption.
The best way to deal with such matters is for the partners to enter into a buy/sell option agreement. This agreement is often included in a shareholders’ agreement discussed at section 6.3. A buy/sell option agreement is a contract entered into between business partners whereby they agree that if one partner dies or is unable to continue in the business, the surviving partner(s) is bound to buy out the other party’s share in the business. Specific events that may trigger a buy/sell option agreement include death, long-term disability, retirement or bankruptcy.
One problem of these types of arrangements is that quite often, the price for the share will often be cost or cash flow prohibitive. At times when clients have approached me for advice on such a matter, I have usually recommended that all partners obtain personal insurance (as discussed in section 8.3) that will pay out a sum of money to the remaining partner(s) which can be used to purchase the business share in question.
On the death of its owner, a business may be either:
A buy/sell agreement, however, will take precedence over a will because the business will be transferred pursuant to the contract, triggered by the death or disability of one of the business owners. A properly drafted buy/sell option agreement will take the stress out of this aspect of the partner’s death/disability and ensure that the surviving partner(s) are not forced to remain in the business against their will.
An example of where this did not work was a large mechanics business based in South East Queensland which had a large turnover of over $3 million a year, significant commitments with various premises, and a large number of staff to operate the business. The business was owned by two friends and one of the duo suddenly died. Overnight, the business lost a significant amount of its capacity and also had to deal with grieving staff members and family. The deceased’s family decided that they wanted to stay in the business after his death. The surviving business owner was then forced to be in business with people that he did not know or particularly like. As a result of this forced partnership, the business suffered significantly, closing various premises and being left in a situation where they could no longer operate. Eventually, the business folded and the parties were left with nothing as they could not work together. Had the original partners put a buy/sell option agreement in place, the surviving business owner would have been able to take over the business and continue to operate in exchange for the deceased partner’s estate receiving a cash payment for their portion of the business.
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